In a report published Tuesday, Spotify revealed the inner workings of its payout systems for artists with music available on the service. The company debunked the claim that the service pays per stream, revealing that things are slightly more complex.

Rather than a flat rate per play of a song, Spotify considers the success of an artist relative to the entire Spotify ecosystem to determine how much money they get. Royalties for, say, one song are paid out based on the proportion of plays it gets out of all of the plays Spotify doles out in a given time period.

There are other factors to the payout formula. How much revenue Spotify earns in a month determines the total amount of royalty money available on a country-by-country basis. After that, Spotify does the math on how much traffic a given artist constituted for the month. For instance, if Spotify has $100 in royalty money from one country and an artist represented 0.01 percent of that month’s streams, the payout for that country would be 0.01 cents.

Of that proportion, Spotify keeps 30 percent for itself, and 70 percent goes to the “master and publishing owners.” So if the music is owned by a label, the 70 percent goes there; if the music is owned by the artist, the payout goes directly to the artist. The 70 percent figure appears to be a bit flexible. Spotify writes in the post that it "negotiates... royalty economics with labels and publishers in each territory." From there, if the artist operates on a royalty rate under their label, the artist is then paid out of that 70 percent of the tiny proportion of money their music represents in Spotify’s overall traffic.

The report comes as a response to individual artists reporting the money they’ve earned from the service, which often appears to be piddling and is almost always reported as “per stream.” Musician Zoe Keating revealed in August that she earned $808 from 201,412 streams of her two albums on Spotify, a return of 0.4 cents per play, during the first six months of 2013.

According to Spotify’s accounting, Keating’s return is low. Spotify claims that it’s putting out “an average 'per stream' payout to rights holders of between $0.006 and $0.0084” (0.6 to 0.84 cents). And while a per-stream rate can be reverse-engineered from an artist’s total payout, Spotify was actually using the proportional system above to determine payout instead of the sheer number of plays.

Artists have noted in the past that Spotify appears to pay differently per stream depending on whether that stream was by a paid-premium user or a user whose listening is ad-supported. Spotify states that this is a factor in determining the overall revenue pot, but the company doesn’t include it in the formula for determining the revenue per artist.

In November 2012, musician Damon Krukowski wrote on Pitchfork that Spotify negotiated royalty rates individually for each label, and that his label received the “going ‘indie’ rate” of 0.5 cents per play. This was then adjusted per some of the factors above outlined in “small, invisible print,” like the number of listeners who are subscribers vs. ad-supported. Krukowski wrote that this meant Spotify should have owed his label $29.80 for 5,960 plays; instead, he was paid $9.18.

Spotify’s story doesn’t quite account for this alleged process, so it’s unclear whether its method changed since last year or if “going rates” are given as a sort of ballpark figure to set expectations. When asked about Krukowski’s account, Graham James, head of US communications for Spotify, told Ars that “the amount that labels get from Spotify is the same across labels." James continued, “I don’t know where he got that information from… it’s incorrect if he’s saying he negotiated a per-stream rate.”

In its report, Spotify goes on to give estimates on what artists of different profiles can expect to earn. Using real, anonymized figures, Spotify states that a “niche indie album” earned $3,300 for the month of July 2013, while a “global hit album” earned $425,000.

Enlarge/ Payouts for different types of albums in July 2013, alongside what Spotify estimates it will be able to pay once it hits 40 million subscribers.

Spotify only specifies in the report that these were “actual” numbers, but not whether they were any kind of average or whether the albums were new or recent releases. Mark Williamson of Spotify Artist Services tells Ars that “one [album] is a current top 10 [on] Spotify, one is a current global hit—they’re all fairly current.” The Independent writes that the Daft Punk single “Get Lucky” alone earned $1.08 million on 78.6 million plays.

Spotify goes on to make projections about what artists might earn when the service reaches 40 million subscribers, which is what the company estimates its base will be once it “[reaches] a similar scale to Spotify’s most mature markets.” At that point, it says, a niche indie album could expect to earn $17,000 in a month, while a global hit album would get $2.1 million.

Spotify aims to get across in the report that it does not pay artists per stream and that such a figure is inadequate for assessing an artist's value. Spotify revenue is essentially a giant shared pie between artists—one that fluctuates in size depending on subscriber numbers, types, and locations. Once that lump sum is calculated, Spotify determines the size of the artist’s slice based on their proportion of streams. This is in contrast to a radio-style service like Pandora, which does pay a royalty each time a song is played. The Pandora royalty is based on negotiations and not total proportions of traffic.

Such a system doesn't favor bigger artists and huge hit songs, but in an ecosystem like Spotify’s, their popularity appears to cost the smaller artists. The harder a big artist hits with a new song or album, the more streams they add to Spotify’s overall bulk and the smaller everyone else’s payout from the finite, monthly Spotify revenue pool becomes.

All this said, the size of Spotify’s total revenue pool is on the rise. The company has already cracked $500 million in payouts, up from roughly $150 million in 2011. “Our payouts for individual artists have grown tremendously over time as a result of our user growth, and they will continue to do so,” the company writes.

I would love to read how Xbox Music, Pandora, etc... all handle these artist payouts. With Windows 8, X1 and a WP8 -- it made sense for me to subscribe to Xbox Music and that handles all my streaming needs now.

You can also stream for free from music.xbox.com (but you get ads).

Anyway, it isn't fair that Spotify has to defend itself -- unless they are a lot worse than Pandora and Xbox Music, etc...

How does Spotify get most of its revenue, and how does that factor into the royalty payments? Presumably, its revenue comes from advertising and paid subscriptions, but they are apparently still losing money as a company.

The problem here that I see (though I'm not an accountant by any means) is that if Spotify has to pay out 70% of its revenue, fixed, to rights holders, then unless they decrease their operating costs then they're never going to be able to make any money.

What doesn't seem to be mentioned is that cost to the music consumer are generally lower. I'm going to just guess I'm a pretty typical user (maybe I'm not). I listen to ~100 albums a month for $10. There are repeats, from one month to another, a lot of repeats. But I listen to a lot of different stuff too.

If I actually bought albums I'd likely be spending more like $50 a month. So I'm paying less. Obviously artists will make less off that.

In reality I'm spending about the same, but I listen to more music. Before Spotify I just listened to a lot less music.

This seems fair to me. If Spotify makes more from ads and subscribers, the artists and labels get paid more too, in direct proportion. That's more sustainable for everyone than a fixed rate of x cents per stream.

As for a hit song dominating the plays, that's only because the listeners want to hear it more. As much as I might like (band X you've never heard of), they don't deserve more per stream just because they have indie cred.

The problem here that I see (though I'm not an accountant by any means) is that if Spotify has to pay out 70% of its revenue, fixed, to rights holders, then unless they decrease their operating costs then they're never going to be able to make any money.

While it sounds good in theory, this is a bullshit system that Spotify is using because most likely there is zero transparency for the artists. The game that online publishers play (including some video tutorial sites) is, they tell you "you get a cut proportional to the number of plays your content got last month, relative to the total number of plays" and use "trainer multiplier" jargon to confuse people so they can't easily estimate / compute things themselves to see if they're getting a fair shake.

The reality is, content creators never see the accounting behind the scenes, even if a contract suggests they "have the right to". The real books are always hidden and anytime an artist visits, they're shown a bogus pool of information from which they will draw the conclusion that the numbers are right. The odds that Spotify and others don't rig the numbers to pay out less than they have to (in other words they lie about the total number of plays / the "proportion"), are slim and none.

The only way systems like this can work is with a high degree of real-time transparency, reflecting the massive number of plays on any given day and being able to sort things. But publishers / distributors will never play this game fairly. You're much better off just selling your stuff directly if you can. Might cost a little more to do get the dedicated server setup, the additional certs, etc (you may have to hire a web dev to get it done right), but in the end you know exactly how many "units" you're moving.

Sites like the ones in question should never be used as the artist's main source of income, it should be used as a source of marketing and brand awareness, and you should negotiate up front that they link to your sites on their profile pages, etc.

However they want to slice or dice it, the fact is that it takes a whole lot of plays to equal the revenue of even a single download purchase. And as usual, the labels have used the new business model to ensure they get a larger slice of the revenue that comes their way and pass less on to the creators.

Nobody should ever be deluded into thinking that they're supporting their favourite band by streaming their songs. If you love your music, buy a download, a concert ticket, or some merch. The artists will scarcely see a dime from streaming services.

I would like to know how Spotify managed to negotiate these terms, because they seem more than a little weighted towards Spotify. By the way this is described Spotify pays out 70% of their revenue - independent of how much music is actually played, or how much revenue their actually is.

This means that the artists are at the mercy of Spotify's decisions on pricing, if Spotify keeps their costs low enough, then they could make a strong effort to undermine competition on price, especially since they have costs that are fairly non-responsive to the level of usage, so having 100,000 people paying $5/month is better than having 50,000 people paying $10/month, up to the point where the additional cost of servicing a new customer intersects with the revenue from that customer.

What's interesting then is that the artist/labels would get the same payment for both cases, despite the fact that there are twice as many customers (and hence likely twice as many plays). If we assume a finite sum market for music consumption (there are only so many ears that can listen to a finite number of hours of music) then this would suggest that some portion of the Spotify customers will be lost from other revenue sources (radio, direct purchase) This seems like it would have the potential to reduce overall revenue.

Since I have a feeling the dealmeisters at the large labels are fairly savvy (after all they seem to squeeze money out of artists pretty well) I am going to hypothesize that these contracts stipulate minimum service fees.

We (The SkullProject) are releasing our new album and for the first time we are omitting all streaming sites. There is zero benefit to us.

I'm curious how an approach like this would affect exposure of a new (indie) album.

My point is that as an indie artist, streams have NEVER translated into sales. This is how it is of MOST indie artists.

I suppose it's important for you as an artist to know your audience: Who likes your music, who buys it, who wants to hear it, who goes to your live shows, etc. and matching your marketing and exposure to those areas. For me, bands that aren't on streaming services (whether it be a subscription service like Spotify, or a radio service like Pandora or iTunes Radio or what have you) may as well not exist. Those are the only ways I discover new music anymore, precisely because I am more likely to hear margin/indie artists through those sources. The music I like (a lot of elctronica/psybient/ambient/idm/etc.) is never going to be played on traditional radio, and is rarely covered in music media, so what are my choices? Buying albums blind as they show up on Amazon? No thanks.

I'm not trying to argue for or against your decision, but I suspect the raw financials aren't the only way many indie artists make the decision to allow their music on streaming services. I do see how the financial model, at least for Spotify, can make it a bit of a Faustian bargain even under the best of circumstances, however.

The problem here that I see (though I'm not an accountant by any means) is that if Spotify has to pay out 70% of its revenue, fixed, to rights holders, then unless they decrease their operating costs then they're never going to be able to make any money.

If plays and revenue increase ten-fold, the 30% is almost pure profit since it just means paying Amazon to automatically spin up more cloud servers, and for the extra streaming bandwidth.

You're trivializing bandwidth and server capacity. If profits rise 10x then expenses most likely rise linearly or at the very best, less than linearly to some scaling point where there's a huge infrastructure upgrade. Amazon didn't handle their current traffic with the software and infrastructure design that they launched with. With each infrastructure redesign to handle increased scale, you reset your bottom baseline operating costs. Call it a can't drop beneath this revenue number. If Spotify then sees a 10x decrease in usage, it's left with an overengineered code design and very likely a baseline infrastructure setup that is unsupportable. That's the risk they take and where the growth comes from.

In the current setup, artists see more money as usage, hence revenue increases. Spotify makes a better profit margin as usage increases up until the next scalability point in their design. Then everything resets itself and the increased profit margin enables them to weather the storm of the design change leading up to the scalability event. All the while artists are paid a la carte strictly governed by usage. They literally have no risk in the game and therefore, no real reason to complain.

However they want to slice or dice it, the fact is that it takes a whole lot of plays to equal the revenue of even a single download purchase. And as usual, the labels have used the new business model to ensure they get a larger slice of the revenue that comes their way and pass less on to the creators.

Nobody should ever be deluded into thinking that they're supporting their favourite band by streaming their songs. If you love your music, buy a download, a concert ticket, or some merch. The artists will scarcely see a dime from streaming services.

If you want your pet band to benefit from your patronage then you simply have to be aware of what avenues generate the most revenue for them. Certainly don't assume that funneling money through their label will do them any good. That's the key thing all of the whining musicians seem to be missing.

They've all forgotten what crooks their labels are. Those are the feet that should be held to the fire first.

Plus the idea that a single streaming of a single song to a single person should be of any significant value just defies mathematics and logic anyways. You're not going to get a bonanza payday from one single play on KROC (1 million sets of ears all at once). Why expect that from a streaming service?

The problem here that I see (though I'm not an accountant by any means) is that if Spotify has to pay out 70% of its revenue, fixed, to rights holders, then unless they decrease their operating costs then they're never going to be able to make any money.

We (The SkullProject) are releasing our new album and for the first time we are omitting all streaming sites. There is zero benefit to us.

I'm curious how an approach like this would affect exposure of a new (indie) album.

My point is that as an indie artist, streams have NEVER translated into sales. This is how it is of MOST indie artists.

I think your approach has upsides and downsides. Sometimes it feels good to listen to "proper" indie stuff you don't get in the mainstream channels and streaming services, finding those little gems that you actually enjoy. Oftentimes people don't bother though. "Is it on Spotify? No? Screw it then." And often I feel the same. In some ways the Golden Age of music was the mid 2000's imo. You had lots of sites where people put up their own work, and there were few easy ways to find something you liked except diggin through blogs and whatnot, and that exposed you to music you would not have listened to otherwise. Now these streaming services are like Google, they bring you things, instead of you finding things.

Eh, anyway yeah. Smaller artists don't make money of it, that's a fact. Have you put out other work before? It would be interesting to know if not being on streaming services makes a difference.

My point is that as an indie artist, streams have NEVER translated into sales. This is how it is of MOST indie artists.

Do you think they translate into lost sales?

This is the key thing Chookalana's missing here. I'm not going to shell out money for your album without hearing it, I'm not going to hear it on the radio, now you're making sure I don't hear it via streaming sites either. There's no way for me to get exposed to it and therefore no reason for me to buy it. If I heard it on a streaming playlist there's no guarantee that I'd buy it, but I sure as hell won't buy it otherwise.

We (The SkullProject) are releasing our new album and for the first time we are omitting all streaming sites. There is zero benefit to us.

I'm curious how an approach like this would affect exposure of a new (indie) album.

My point is that as an indie artist, streams have NEVER translated into sales. This is how it is of MOST indie artists.

I can see that -- but I don't think this problem is necessarily unique to indie artists. Of the music I've streamed over Pandora and iTunes Radio, I have purchased exactly two albums. (Both were Skillet, if that matters to anyone.) I've certainly listened to and enjoyed significantly more artists then that... but it's very rare indeed for me to convert my streamed listening into actual purchases.

This article is presenting things in a very one-sided manner, "These streaming sites are screwing the artists/they should pay more/they should cost more."

Okay. I get that point of view, but even four years ago the issue was "these users aren't paying for any of their music and the artists are starving."

I've only bought 8 albums total. Ever. Everything else I listen to on streams or I just don't listen to. I have three by an experimental pianist that I found from a youtube recording of a second pianist that I have another four albums from (three autographed).

I ran a Pandora station with the latter for awhile and eventually requested the former experimental pianist to get on Pandora. He did. I bought his music later.

The last album is the only time I'll buy music that doesn't absolutely resonate with me. It's a soundtrack from a video game recorded in 5.1 DVD-audio. I ripped it to .flac, for a 3 minute song it has a 50+ megabyte file.

If the music is for sale in the same quality I can get from a free stream, I have no incentive to buy it...

So put the music on spotify streaming in whatever quality, and offer it for sale as a digital lossless download.

As a consumer, I want my subscription money to go to the artists I'm listening to. What I hate about this lumping all plays together is that instead I'm supporting the latest twerker.

I don't get to listen to music all day. If I only listen to 10 songs all month, I'd want my subscription divvied up amongst the artists I'm listening to. Sixty cents each, or whatever it works out to after Spotify takes their cut. I hate that my money is going into the common pool to pay the latest sensation that all the teens are listening to day and night.

We (The SkullProject) are releasing our new album and for the first time we are omitting all streaming sites. There is zero benefit to us.

Maybe I'm a unique snowflake, but when I listen to Pandora it's mostly to find new artists, so that I can buy their CDs. I'm much more likely to buy a CD when I can hear full songs instead of short snippets on Amazon.

However they want to slice or dice it, the fact is that it takes a whole lot of plays to equal the revenue of even a single download purchase. And as usual, the labels have used the new business model to ensure they get a larger slice of the revenue that comes their way and pass less on to the creators.

Nobody should ever be deluded into thinking that they're supporting their favourite band by streaming their songs. If you love your music, buy a download, a concert ticket, or some merch. The artists will scarcely see a dime from streaming services.

If I'm paying $10 a month to Spotify instead of buying 10 $1 downloads a month, and artists are getting less money, then it sounds like the problem is with the labels, not the streaming service.

I paid more per month as a subscriber to Rdio than I ever did purchasing albums or songs. Yes, I was listening to more music, and the money was spread between more artists, but more money is more money, regardless of how much I'm listening.

As a consumer, I want my subscription money to go to the artists I'm listening to. What I hate about this lumping all plays together is that instead I'm supporting the latest twerker.

I don't get to listen to music all day. If I only listen to 10 songs all month, I'd want my subscription divvied up amongst the artists I'm listening to. Sixty cents each, or whatever it works out to after Spotify takes their cut. I hate that my money is going into the common pool to pay the latest sensation that all the teens are listening to day and night.

Then you should seek out those artists that are important to you and find ways to pay them directly: Buy albums direct from their website, buy their merchandise, go to their live shows. Buying or listening to their music through any source that does not begin and end with the band themselves has never been a reliable way to make sure they are rewarded. There are too many people along the way taking a piece of the pie, whether we're talking about internet streaming in 2013, or buying vinyl in 1983.

And this isn't even unique to music! Which do you think earns the farmer more—buying an apple at Kroger, or buying an apple direct at the Farmer's Market?

We (The SkullProject) are releasing our new album and for the first time we are omitting all streaming sites. There is zero benefit to us.

Maybe I'm a unique snowflake, but when I listen to Pandora it's mostly to find new artists, so that I can buy their CDs. I'm much more likely to buy a CD when I can hear full songs instead of short snippets on Amazon.

For me you're lowering the chance that I'll ever give you my money.

Same here. How are you expecting to grow your fanbase if your music isn't playing anywhere?

$10 dollars a month for a CD off Amazon is all I need. I use to buy more when I was younger, but these days my tastes are refined to the point that my purchasing decisions last me forever and not just that one month like before. I guess I'm just not into filler anymore...

One point I'd add though, is that it's very misleading to say a Top album could earn $425,000 the truth of the matter is between 3 major labels, that adds up to only 3 priorities that could possibly make it that peak point per month. And with the amount of money they spend to promote the album that doesn't leave much for the artist. A decent music video alone starts at a budget of $100,000.